Enron and Merrill, Greece and Goldman

Did big banks break the law during our recent global debt-fuelled boom? The usual answer is: no – they just took advantage of loopholes and captured regulators. The world’s biggest banks are widely supposed to be too sophisticated to be tripped up by the legal system.

The failure of Lehman therefore opens a can of worms for close and potentially productive examination in coming weeks. But so does the issue of Greek government debt in April 2002.

According to an offering circular dated 22 April 2002, The Hellenic Republic offered 3.5 billion of bonds, due 22 October 2022, that “will bear interest from, and including, 24 April 2002 at the rate of 5.90 per cent”. The joint lead managers include, from the international side, Goldman Sachs, Morgan Stanley, and Deutsche Bank.

Goldman has, of course, admitted it helped manage down reported Greek debt levels through off-balance sheet transactions in 2000 and 2001. Gerald Corrigan, a senior Goldman executive, speaking before the UK Treasury Select Committee recently, said that the reduction in reported Greek debt was “small but significant”; in fact, it was around 1.6 percentage points of GDP, which is not small.

(From the Bloomberg story on Corrigan’s testimony: “The transactions reduced the country’s deficit by 0.14 percentage points and lowered its debt as a proportion of gross domestic product to 103.7 percent from 105.3 percent, according to Goldman Sachs.” See also the less forthright Goldman Sachs statement on the company’s website.)

The April 2002 offering circular did not disclose the debt swaps. There may have been other documentation available to investors that did reveal true Greek debt numbers – and perhaps these were discussed in the relevant road shows. We are not here taking a position on what was and was not disclosed; this is a matter for a proper official investigation. We also do not know what the other involved banks knew and when they knew it.

If it were the case that Greece’s true debt levels were known and not disclosed by the investment bankers involved, any reasonable investor – or the sovereign debt experts with whom we have discussed this matter – would regard this as withholding adverse material information.

Gerald Corrigan, who is also former head of the New York Fed, argued that Goldman did “nothing inappropriate” – but he was referring to the off-balance transactions of 2000-2001. He has not yet spoken in public about the potential nondisclosure of material information in April 2002 (and perhaps at other dates after the Greece-Goldman swaps).

As Senator Kaufman points out in his latest speech, there is nothing necessarily illegal about any non-disclosure in Europe – these bonds were issued under Greek law. And these bonds were definitely not registered under the US Securities Act of 1933; this is clear in the prospectus.

However, if any of these bonds were sold in the US to “qualified institutional buyers” (QIBs) under rule 144A (an exemption to registration requirements under the 1933 Securities Act), there is a potential legal issue (here I’m just rewording what Senator Kaufman said). Rule 10b-5, under the 1934 Securities Exchange Act, definitely applies to securities sold under 144A – i.e., selling securities to anyone in the United States while deliberately withholding material adverse information is not allowed.

Some people in the market think that around 10 percent of this Greek debt issue was sold under Rule 144A to QIBs; such sales may or may not have been handled by Goldman. Again, this can only be determined by an official investigation – hopefully the Senate Judiciary Committee, on which Senator Kaufman serves, can take this up.

Goldman could be sued by investors who feel they were misled in this fashion – although, realistically, it would only happen if the bonds default; the cost of annoying Goldman otherwise is too high. Most likely Goldman will reach an amicable agreement with any aggrieved parties. (Merrill’s problem was that Enron failed – as with Lehman, this launched an extensive set of enquiries).

Whether the SEC or any attorney general (e.g., in New York) will take any action, civil or criminal, remains to be seen. It is obviously hard – for legal and political reasons – to take on and prevail against one of the world’s biggest and most powerful banks. Too big to fail banks are also too big to sue successfully – unless they collapse (which is why we keep coming back to Lehman). (Among other things, in the Greece case there would likely be a big argument about whether the Statute of Limitations applies and to whom.)

In any case, it is time to close the loophole that effectively allows deception regarding securities sold into the United States. Rule 144A should be abolished — US residents (individuals and institutions) should only be allowed to buy securities that are properly registered with the SEC.

If other countries are willing to have their people buy fraudulent securities, that is their problem. This is no longer acceptable in the United States.

“Most likely Goldman will reach an amicable agreement with any aggrieved parties. (Merrill’s problem was that Enron failed – as with Lehman, this launched an extensive set of enquiries).” Goldman Sachs has too much at stake in their view, so their better judgment tells them to settle properly with the parties – sooner rather than later. (Don’t forget, Spring forward this Saturday, March 20, 1010)

Indeed, deep is the perversity of the regalian financial abysmal system.

Criticizing far into it requires holding one’s breadth for a very long time, and an amazing will, as the horrendous sirens of wealth sing the praises of conventional wisdom, pernicious corruption, and immorality triumphing.

Very admirable comments Mr. Johnson. And it adequately describes the situation. Hoever, it is a little too late. The horse has already gotten out the barn door. Only way to bring these guys down is to let them go belly up. And that’s going to be bad for everybody.

1. Lehman’s alleged attempts to save itself while swirling around the drain are hardly “during our recent debt fueled boom.” While one can perhaps argue that the alleged shenangins prolonged Lehman’s life and therefore perhaps slowed the bubbles burst, none of what I have seen reported about the Valukas report has much to do with how we got into the “debt fueled boom.” But that isn’t stopping Senator Kaufman, and now Simon, from using them as political ammunition.

2. As Senator Kaufman recognized, but Simon left out, we may not like these transactions in hindsight, but that does not mean they were illegal at the time. The Senator’s point was that we should consider whether to change the law, whereas Simon prefers to imply criminality. Let’s just say the fact that Lehman got a legal opinion from one of the world’s largest and most respected law firms and the fact that its auditor was fully aware of the Repo 105 transactions are not exactly consistent with an intent to defraud anyone. Again, because when we look back on it we do not like the rules does not mean that Lehman didn’t follow them.

3. Simon should speak with a securities lawyer about whether, “It is a serious crime for professional advisers and financiers to assist in securities fraud” and in particular about the Stoneridge decision. Moreover, he better have a pretty good understanding of English law and GAAP to be accusing Linlaters and E&Y even of error, much less criminality.

4. As to Goldman, by his own admission, Simon is merely speculating. He has no idea whether Goldman handled any Rule 144A placements of Greek debt, but why let that get in the way?

5. Finally, the big non-sequitor. What does doing away with 144A have to do with anything? Obviously, it would be great for lawyers (maybe James will find it easier to get a job if he wants to chase commas) who get to do all the extra registrations, but other than raising the cost of capital, who else benefits? Is there any reason to believe that fraud or misrepresentation is more common in private placements? Is there any reason to believe that having the SEC more involved will reduce fraud and deception?

Eliminating 144A seems like an overstep in this case. In general, the existing regulations adequately protect investors from deliberately withholding information, and otherwise, these buyers should be capable of exercising appropriate judgment. Investors are perfectly capable of demanding the protection of registration if they feel it’s of value. Barring a demonstration that sale of unregistered securities is causing systemic harm beyond the damage done to the parties involved, its not an option that should be considered.

“In any case, it is time to close the loophole that effectively allows deception regarding securities sold into the United States. Rule 144A should be abolished — US residents (individuals and institutions) should only be allowed to buy securities that are properly registered with the SEC.”

What in the world are you talking about? Please, please just admit that you haven’t even the vaguest idea what it means for securities to be registered (“with the SEC”!) under the Securities Act.

You do realize that spouting off like firehose of ignorance on topics about which you clearly know absolutely nothing just undermines your authority on the (likely very few) subjects that you might actually know something about? Or maybe you don’t. In eiter case, thanks for the laugh.

“Unlike a partnership or sole proprietorship, shareholders of a modern business corporation have “limited” liability for the corporation’s debts and obligations. As a result, their losses cannot exceed the amount which they contributed to the corporation as dues or payment for shares. This enables corporations to “socialize their costs” for the primary benefit of shareholders; to socialize a cost is to spread it to society in general.”

“Did big banks break the law during our recent global debt-fuelled boom? The usual answer is: no – they just took advantage of loopholes and captured regulators. The world’s biggest banks are widely supposed to be too sophisticated to be tripped up by the legal system.”

No – incorrect model of graft, but not for the followup question that peeks into the lacunae: ” But is this really true?”

The biggest theft was the theft of legislature which makes laws, the executive which approves them, and the judiciary which interprets them.

The modus operanid outlined in the above quote, in my view, may be true of Al-Capone’ish graft, but not for imperial graft which is all kept “legal” because the “sovereign” itself makes its own laws.

Here is a short Excerpt from the Introduction to Monetary Reform Bibliography:

Economics and Money aren’t supposed to be as abstruse as it is made out to be, and nor does it take a Ph.D. from M.I.T. to realize that one is being taken for a sodomized ride on the Capricorn of economics gibberish. It is the responsibility of every denizen of the world to understand how humanity is being herded into global debt-enslavement and a centrally managed world-government, baby-step at a time, by manufacturing deliberate crisis and then proposing the next baby-step as its solution or fait accompli. Each baby-step erodes away some aspect of national sovereignty. 911 helped setup the global police state as a proposed solution to ‘terrorism’ – a manufactured product – to create the sine qua non mechanisms for world-government. “World government could only be kept in being by force”, as Bertrand Russell had put it.

The latest financial crisis is designed to systematically create a central world-banking system, as a proposed solution to ‘bad loans’ – again a manufactured product – to be managed by a global banking cartel under legal sanction. “Give me control of a nation’s money supply, and I care not who makes its laws”, as the Rothschild banking scions boldly narrate in almost every generation. Today, the cumulative world debt is in uncountable trillions, and there is no nation on earth which is not beholden to some banking cartel, be it the WB-IMF tag team of economic mercenaries preying upon the resource-rich nations of Global South (see John Perkins), or the private central banks lending parasites doing the same to their richer brethren in the Global North (see Money as Debt).

On top of them both, sit the same handful of private banking families in their interlocking relationships, protected by their own hand-crafted instruments of commerce, trade-treaties, and their hand-picked political governance which creates for them the legal sanctions necessary for the entire global racket based on unpayable debt to flourish. Once a nation, like a person, can’t pay its debts, demand for the proverbial “pound of flesh” is as convincing as making an offer one can’t refuse.

In contrast to the Neanderthal gangster Al Capone, or Michael Corelone in the blockbuster movie ‘The Godfather’, who weren’t smart enough to change the laws of the land in favor of their criminal enterprises and therefore, the state’s policing apparatus could be relied upon to eventually take parasites like them down, these banksters connivingly write the very laws of the land in their favor. They own, or control through proxy, the media, the legislatures, the executives, the think-tanks, the foundations, all levers of power, good and bad loans, and discourse itself, in pretty much all major societies – from G7 to G20 (excepting to some extent BRIC, Venezuela, and Iran) – cleverly hiding their own role behind the scenes in constructing their global fiefdom.

That aspiration was unabashedly and boldly re-stated by bankster James Warburg in 1950 to the US Senate – the son of bankster Paul Warburg who not only founded the Council on Foreign Relations in 1921, but was the key architect of the Federal Reserve System under the clandestine auspices of Senator Nelson Aldrich at Jekyll Island in 1910 (see Jekyll Island) – “We shall have World Government, whether or not we like it. The only question is whether World Government will be achieved by conquest or consent.”

End Excerpt

Unless the law which gives all powers to the Federal Reserve System to coin the realms money by enslaving the nation in perpetual debt, and to regulate the interest rate with which it controls the realms, and the world’s, economy, to print money at will like monopoly play money, and to regulate its own constituting member banks (like the fox guarding the coups), is forthrightly addressed, no grand graft through boom-bust can either be understood, nor the boom-busts themselves understood, nor any effective antidote formulated because the systemic disease has been improperly diagnosed.

Oh well. I Thought this is obvious. The rest of the palpable obviousness may further be gleaned here:

Rickk is right on. A law professor at University of British Columbia law school, Joel Bakan, has written (2004) a book The Corporation which demonstrates the pathological pursuit of profit (at expense of society) and power. It is not a socialist demagoguery but a well documented and reasoned position.

Here is the thing AJ, some people don’t understand the difference between capitalism and a “moneyaucracy”. You’re one of those. Goldman Sachs, Lehman Brothers, and Ernst and Young told lies which were abusive to the public, the their customers, and to market participants. Some people like you don’t understand that because you’ve only read sections of Adam Smith, listened to idiotic statements by non-college graduate Rush Limbaugh, and hypnotically repeated mantras by B-actor Reagan.

What you don’t understand is, if a few Professors like Simon Johnson didn’t stand for their convictions instead of hiding in the ivory tower and corridors of neutrality of a University, firms like Goldman Sachs would have you and this entire country in deep pain before you even got to do the K-Y reach-around.

Doing away with 144A would therefore require that all these transactions are registered, which would in turn reduce ‘opacity’ (the inability to parse through complicated transactions owing to there being no central location where all this information is stored).

You have clearly drunk deeply at the well of deregulation. Preaching that ‘liberty’ and ‘freedom’ means not having to disclose information that allows post-collapse reconstruction of what went down to occur is a bit like saying that policemen hinder the freedom of rapists. Perhaps the analogy is too subtle?

I am looking for accountability, and if I find I was legally ripped off, then I want to change the law and strip some people of all their assets. I think a more subtle point being offered here is that even if one portion of the legal system does not specifically prohibit a practice that adds no tangible value, other legal channels may be available that can be, for example, used to show that there was intent to commit fraud when investment banks shorted their own products. That is the heart of fraud.

“The Corporation is a 2003 Canadian documentary film written by Joel Bakan, and directed by Mark Achbar and Jennifer Abbott. The documentary is critical of the modern-day corporation, considering its legal status as a class of person and evaluating its behaviour towards society and the world at large as a psychiatrist might evaluate an ordinary person. This is explored through specific examples.

The Corporation has been displayed worldwide, on television, and via DVD, file sharing, and free download. Bakan wrote the book, The Corporation: The Pathological Pursuit of Profit and Power, during the filming of the documentary.”

“Me thinks thou doth protest too much” and, indeed, the premptive counterattack has always been intimidation and a great deal of noise. Esentially, in the face of all that is wrong and broken and with an economy loaded down with growing misery, we are going to NOT ask the RIGHT questions because of Why?
Because it is not beyond a shadow of a doubt that maybe some slipped laws and loop holes were only stretched rather than broken? But let’s not ask real questions because we might offend the propriety and protacol of their integrity. Holy Cow AJ; are you crazy or do you think we are? These guys should be in under investigation simply because they have beroken the economy and walked away with the people who made the rules twist and turn in their favor (at lkeast on the surface). Real people were seriously hurt. It is undoubtedly correct to look at Enron as the model of how these people practiced, because anyone who knows wall street knows that Enron was the darling and pentultimate model of how to do business just prior to the whole house of cards collapsing and taking a great deal of hard working retirement dreams with it. It is outrageous that anyone should fault Simon Johnson for going too far with these very legitimate questions being raised. The real problem is that it has taken too long and the trend has been set to accept these default mills as God’s work. This is not God’s work and might I just add that these meglomaniacs in financial power are no gods. You just think they are!

“Me thinks thou doth protest too much” and, indeed, the premptive counterattack has always been intimidation and a great deal of noise. Esentially, in the face of all that is wrong and broken and with an economy loaded down with growing misery, we are going to NOT ask the RIGHT questions because of Why?
Because it is not beyond a shadow of a doubt that maybe some slipped laws and loop holes were only stretched rather than broken? But let’s not ask real questions because we might offend the propriety and protacol of their integrity. Holy Cow AJ; are you crazy or do you think we are? These guys should be in under investigation simply because they have beroken the economy and walked away with the people who made the rules twist and turn in their favor (at lkeast on the surface). Real people were seriously hurt. It is undoubtedly correct to look at Enron as the model of how these people practiced, because anyone who knows wall street knows that Enron was the darling and pentultimate model of how to do business just prior to the whole house of cards collapsing and taking a great deal of hard working retirement dreams with it. It is outrageous that anyone should fault Simon Johnson for going too far with these very legitimate questions being raised. The real problem is that it has taken too long and the trend has been set to accept these default mills as God’s work. This is not God’s work and might I just add that these meglomaniacs in financial power are no gods. You just think they are!
BRUCE E. WOYCH

Section 1 of Pub. L. 91-452 provided in part that:
“The Congress finds that (1) organized crime in the United States
is a highly sophisticated, diversified, and widespread activity that
annually drains billions of dollars from America’s economy by unlawful
conduct and the illegal use of force, fraud, and corruption; (2)
organized crime derives a major portion of its power through money
obtained from such illegal endeavors as syndicated gambling, loan
sharking, the theft and fencing of property, the importation and
distribution of narcotics and other dangerous drugs, and other forms of
social exploitation; (3) this money and power are increasingly used to
infiltrate and corrupt legitimate business and labor unions and to
subvert and corrupt our democratic processes; (4) organized crime
activities in the United States weaken the stability of the Nation’s
economic system, harm innocent investors and competing organizations,
interfere with free competition, seriously burden interstate and foreign
commerce, threaten the domestic security, and undermine the general
welfare of the Nation and its citizens; and (5) organized crime
continues to grow because of defects in the evidence-gathering process
of the law inhibiting the development of the legally admissible evidence
necessary to bring criminal and other sanctions or remedies to bear on
the unlawful activities of those engaged in organized crime and because
the sanctions and remedies available to the Government are unnecessarily
limited in scope and impact.
“It is the purpose of this Act [see Short Title note above] to seek
the eradication of organized crime in the United States by strengthening
the legal tools in the evidence-gathering process, by establishing new
penal prohibitions, and by providing enhanced sanctions and new remedies
to deal with the unlawful activities of those engaged in organized
crime.”

Theee G-ldmen and friends are really only legitimized organized crime, because governmental agencies have turned a blind eye, or been complicit. Congress and the Administration have played a role as well.

RICO certainly would seem to apply, if some clearly illegal endeavors are uncovered. Intuitively, I have to believe there have been some, if not many, illegal activities. Getting to the bottom of this mess will be like breaking the “blue code of silence.” Assuming that happens, it’s going to make a great book and movie.

Mr. Merkel,
Interesting no examples that came to your mind that you wanted to share. Let’s hear ONE example of some of that good that rule 144a has done. Just ONE example. You remind me David of the typical Republican who whines that anything they don’t like is “unconstitutional”. When you ask them what exactly is unconstitutional about it they go “duuuuuuuh, eeeehm duuuurrr” and then go back to blowing bubbles in their soup.

It’s the FIRE economy (Finance, Insurance, Real Estate). This fictional bizzaroworld pays all NYC bills. If they did RICO, perps in buses would be tried in a small auditorium. This rigged racket will now be overseed by the “Federal Reserve System” , a deliberate misnomer, a superbank with other bank CEO’s on it’s board. So , it is not federal, and there are no reserves…it is private. But now the Patriot, Sen. Dodd, will have them be our watchdog. Good Idea! You are Brilliant!

The creation of obscene wealth for a few individuals by shuffling paper and obfuscating reality is madness and destructive. Financial institutions must be regulated down to their fancy shoe tops and miscreants jailed for long prison terms when they violate ethics, morals and regulatory laws. Perhaps a few heads on pikes would convince these robber barons that “society” is sick of them and their abiding greed.

The bigger danger here is that by blaming Lehman for the financial crisis and by blaming a few auditors and lawyers for the Lehman failure, we spread the “few bad apples” fallacy. The crisis of 2008-9 was systemic and global in nature. Any remedies must address the fundamental issues, not merely provide feel good changes.

A legal opinion from Linklaters that the Repo 105 transaction was “legal” (whether that means that the Repo 105 transaction, taken in isolation, was not a criminal act or that using Repo 105 to pretty up Merrill’s apparent liquidity picture before the 10-Q is not clear) does not release Merrill executives or E&Y partners from criminal liability.

At any rate, the Repo 105 transactions were almost certainly intended to mislead. From reading the Jenner & Block report, the Repo 105 transactions don’t seem to have had any other legitimate purpose.

This would in theory be enough to support criminal securities fraud charges. However, if charges were brought, getting a conviction for securities fraud against a well-heeled defendant is very tough.

Prosecutors hate to lose cases, and these kinds of cases are very long and expensive even if the prosecution wins on all counts. So unless there is some political benefit to be seen as “going after Wall Street” (Andrew Cuomo, are you reading?) I do not see charges being brought.

As the Jenner report says, the legal opinion from Linklaters was that the transactions were a “true sale” which is the kind of thing that you get legal opinions on. It would be decidedly unusual to get a legal opinion saying that what you want to do is “not criminal.” I can’t think of anyone who would want such cold comfort.

But the relevance of the audit’s knowledge and the legal opinion is to whether the people involved had the requisite intent (or scienter) to underlie civil or criminal penalties. Both are facts that the defense will use to argue that they did not, “Look, we thought this was all allowed.”

The bigger issue is that according to Jenner, their disclosure said that Lehman accounts for all repos as financing, which it appears may not be have been true.

I see still no response from Merkel. Wait, next Merkel is going to tell us it’s “Rule 144a is really really really useful, and really really really streamline” cause he’s a trader and all traders know that. If he repeats it enough and throws enough “really”s in we’ll finally be convinced. Unquestionably…. indubitably….

The unfortunate bottom line is that we can’t legislate morality, no matter how hard we try. Goldman, and most of the TBTF’s is immoral. I know that they have fleets of attorneys, accountants, actuaries, and mathematicians telling them where the edges are legally, and will keep walking along or just inside every legislative line we draw. Until we bring back morality as a trend and bankers learn that shame is not pofitable (when everyone stops doing business with them, including Treasury and the FED), nothing will actually happen. This is a corrupt plutocracy that we live in, and the bankers are only a part of the larger social issue of failed values that promise to bring our world to an ugly end, sooner or later.

Look, I typically don’t follow comments after I comment, so don’t be surprised that I didn’t write anything.

I was a bond manager for 6 years. I bought billions of dollars worth of deals that were issued under 144a. I was a risk manager for several life insurance companies for 6 years. I talked with the bond managers about rule 144a securities. They didn’t view it as a risk factor, and neither did I when I became a bond manager.

So much debt is issued under rule 144a, it is incomprehensible to me that we would do without it. When you are managing a lot of money, the announcement of a bond deal comes, and it can close in as little as 7 minutes or as much as a few days. There is no time for a prospectus up-front.

Disclosure is standardized, so you look at the terms, and decide whether you want to put in for the bonds or not, after consulting with your credit analyst.

144a, far from reducing disclosure, standardizes it. It makes life easy for issuers and bond managers. We all have Bloomberg terminals, and can get all of the data we need with the touch of a few keys. I don’t need a detailed prospectus for most deals — most of the language is boilerplate. It is genuinely rare for there to be something new in a bond prospectus. They are pretty dull. (That said, I have torn apart unique ones in my career and have found key provisions that make a difference with respect to value.)

Simon has never been a bond manager; I doubt you have managed bonds as well. You should be more careful about what you say, you have not done your homework.

I am doing some research to see what percentage of bond deals in the US get issued under 144a — I think it is around 10%. That’s not trivial; it makes life easy for bond managers. If 144a was a ripoff for the buyside it would not exist. QIBs manage most of the assets of this country, and 144a is not a concern. Maybe some pointy-headed academics that don’t know the market, but not QIBs.

BRUSSELS — “Greece warned Thursday that it will be forced to turn to the International Monetary Fund if the EU can’t agree to a bailout plan next week that will help reduce its market borrowing rates.”